Co-published project finance guide: Dominican Republic


Snapshot of a growing market


Ernesto Bournigal Read and Ingrid María Jesús Rodríguez of OMG describe a project finance market where debt and equity opportunities are ripe for the picking


T


he Dominican Republic (DR) has always been one of the region’s most attractive targets for foreign investment. Those


investors should take a closer look at the country’s project potential: project finance has become increasingly common, with both debt and equity opportunities. Here is a snapshot of the market, and how to navigate its hurdles and rewards.


IFLR: How has the DR’s project finance industry performed over the past 12 months, and which sectors have been the most active? The project finance industry as a whole has been somewhat less active than most years in the DR. Much of that is attributable to 2012 being an election year, with the months leading up to the elections providing uncertainty as to the outcome. With the exiting of one government, and an incoming government becoming familiar with pending authorisations and permits, the timing of some projects was most probably affected. Additionally,


important


restructuring efforts for various projects in the country have continued from 2011, and


have certainly made financing for projects of a similar nature as those in restructuring (primarily real estate developments) difficult as well. However, during the first semester of


2012 the DR government was very active in procuring financing for local contractors in order to finalise a nationwide initiative seeking construction, remodelling and paving of highways, streets and roads along the country. Additionally, the project finance market also witnessed key deals in sectors relating to steel, renewable energy projects, as well as more than one leveraged acquisition of fuel distribution companies, to name a few. The second semester of 2012 has already


provided at least two important refinancings of highly structured infrastructure projects, one of which was successfully able to place a 144A bond issuance of over $500 million. Furthermore, we have also witnessed large syndicated financings that are being placed for the purpose of toll roads in different sections of the country.


“The project finance industry as a


whole has been somewhat less active than most years


” 70 IFLR/December/January 2013


IFLR: The DR has huge renewable energy reserves. What are the challenges to converting this into power? The DR has passed legislation in order to permit sponsors to venture into new energy sources. The Renewable Energy Incentives and Special Regimes Law promotes private investment developed from renewable energy sources, and aims to promote social investment in renewable energy community projects. Such projects are obviously beneficial to the country, on the grounds that the installation of new renewable energy power plants will help generate local jobs, encourage agriculture and forestation and produce funds for social development. Currently there is one operating


renewable energy park in the DR, the Los Cocos – Quilvio Cabrera Park, located in the community of Juancho, Pedernales, a wind park with a capacity of 33MW, and


designed to increase in the next years to 88MW. Likewise, there are two wind energy projects approved by the Inter- American Development Bank, and one solar energy project in the process of being structured. Of the wind energy projects, one is to be established in Bani and projected to start with a capacity of 30MW, and another in Montecristi, with a projected capacity of 55MW. The solar energy project will be located in Monte Plata and Yamasa with a capacity of 54MW. According to estimates offered by the National Energy Commission, by 2013, 5.4% of the total output of power generation shall be provided by wind facilities, bearing compliance with scheduling of the different projects. Nevertheless, there are several barriers in


the DR which threaten the sustainable growth of investment in renewable energy in any of its forms, such as the several government permits


for the


implementation of renewable energy projects imposing a significant waiting time and suspension of negotiations. Another huge barrier is the connection to the national electricity transmission or distribution grid, which requires the developers to add connectivity, so adding further complications in both logistical and operational costs of the project. At a community level, micro-scale


exploitation of renewable energy also presents difficulties with resource information, and a lack of local technical capabilities in design, operation, maintenance and resource assessment. Another significant challenge is the high cost of investment in technologies for the exploitation of resources and consultancy in the development stage and maintenance of renewable power plants. The Renewable Energy Incentives Law


had granted a 75% exemption of income tax applicable to the investment on renewable energy for three years; nevertheless, with the entry of the new tax reform this exemption has been reduced to 40% as of 2013.


IFLR: Over the past year have you seen changes to the mix of project financiers, and if so, what has prompted this? We have not seen much of a shift in the mix of project financiers generally active in the DR. The usual financiers are a mix of multilateral institutions and governmental agencies such as AFD (French Development Agency), DEG, European Investment Bank, IDB, IFC, and Proparco, coupled with many commercial banks for large deals. Most local banks in the DR are somewhat


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